Business Loans, more specifically the SBA 7a business loan, its benefits,
its drawbacks, how to properly apply for a 7a SBA loan, and how to construct a
business plan that is appropriate for Small Business Administration loans. When you are seeking SBA
business loan financing, it is important to note that there are several things that you are
going to need when preparing your SBA business loan package, developing your SBA
appropriate business plan, and providing both the Small Business Administration
and the SBA lending bank with appropriate credit information and your tax
returns from the last three to five years. In this article, we will also discuss alternatives to SBA loans including the usage of angel investors, venture capital, private lenders, and other funding sources that can assist you with raising capital if you are unable to secure a SBA backed business loan. The most important aspect to
obtaining a 7a SBA Loan is that you have collateral to secure the loan (either
business collateral that you will acquire with the loan funds or personal
collateral that can be used for hypothecation purposes). The following factors
should be considered when you are planning to potentially acquire a 7a SBA loan:

First, what
type of business am I starting and will this business have the proper collateral
to secure the loan?

Second, do I
have the appropriate credit score and credit history length in order to be
considered a worthy credit risk for an SBA loan?

If I default
on the loan, will the business collateral, personal collateral, and personal
income that I have be able to ensure that I am able to repay both the principal
and interest?

Is there a
risk that I may go into bankruptcy if the business fails?

Do I have a
well written business plan in order to secure the SBA 7(a) loan that I am
seeking?

The 7a SBA loan was developed
by the Small Business Administration to provide entrepreneurs with a government
backed guarantee so that business people could obtain loans for a broad scope of
business purposes. These loans can be used by both new businesses and
established businesses. In regards to established businesses, it is often easier
to obtain a 7a SBA loan as an established company inherently carries less risk
than a loan that has been extended to a new business. In regards to who is and
who is not eligible to apply for the SBA 7(a) loan – the requirements are
actually quite simple. Foremost you are required to be a
United States citizen that has a clean record.
People that have committed felonies in the past are not eligible for Small
Business Administration backed loans.

One of the common questions
regarding the SBA 7(a) loan is how much can be borrowed through this program.
Typically, the upper limit for a Small Business Administration backed loan is
$2,000,000. However, certain extensions do apply for companies that need
multiple forms of financing for very large tangible equipment or real estate
purchases. One of the issues that you should be immediately aware of is that it
is not the Small Business Administration that provides loans. Instead, the SBA
provides a guarantee that can be presented to a bank, financial institution, or
other lender that will ultimately provide you with the SBA 7a loan financing
that you are seeking. Only in highly limited circumstances does the Federal
Government (via the Small Business Administration or other government entities)
extend credit directly to individual borrowers or businesses.

One of the best things about 7a
SBA loans is that the length of the maturity terms that can be applied to these
business loans. In most instances, a SBA 7a loan can have a repayment period of
up to 25 years. The maturity for these business loans range from 10 years to 25
years, and most important certain parts of the loan can mature quicker than
other parts of the loan. For instance, if you are buying a piece of equipment
and a piece of real estate you can have the maturity of the loan for the
equipment portion mature in ten years while the real estate portion of the loan
can mature over a much longer period. This flexibility of the SBA 7a loan allows
entrepreneurs to have a wide range of usage of the debt funds.

As we just stated, there is a
significant amount of uses for SBA 7(a) loan. The most common uses for the 7a
SBA loan include:

Business
Development

Owner-Occupied Business Real Estate

Equipment
Acquisitions

Business
Acquisitions

Working
Capital purposes

Inventory
Purchases

However, there are many other
uses for this type of financing facility. We encourage you to visit the Small
Business Administration website if you want to see the full list of applicable
uses of the 7a SBA loan.

The fees related to SBA 7(a)
loans are minimal compared to other traditional business loan sources. At
closing, there is usually a two point closing cost associated with SBA loans
that have a $150,000 face value or less. For each subsequent $100,000 borrowed
(after the $150,000 threshold), there is a three point five percent fee levied
against the loan. In addition to SBA 7a loan closing costs, there can be other
costs incurred with obtaining this loan. These fees include certified public
accountant costs, business planning costs, and possibly fees that may go to a
SBA loan packaging firm that has assisted you with your loan application. In
regards to the latter, there are companies out there that can assist you with
developing your SBA 7a loan application. These businesses are called SBA loan
packagers. The typical upper limit to their fees is $2,500 although the fees can
be hired if you require a substantial amount of capital or your business has a
substantial amount of complexity in regards to your business operations. It
should be immediately noted that the laws regarding Small Business
Administration loans specifically prohibit these firms from receiving
compensation if your loan is placed. They can only charge fees for services
rendered to applying for a 7a SBA loan. As such, any firm that states that they
are entitled to a success fee fro you for placing a SBA 7a loan is incorrect.
When working with a SBA loan packaging firm you should request references from
past clients, understand the success rate of the firm, and make sure that they
are licensed to business with the Small Business Administration and its
associated banks.

One of the other common
questions that we receive regarding SBA 7a loans is the turnaround time
regarding the lender’s credit decision. In most instances you will receive your
answer in 45 days or less unless you have a substantially complicated loan
application or business. Some SBA programs are designed to provide business
owners with much faster credit decisions (in as little as 72 hours). However,
these programs (especially as it pertains to 7a SBA loans) are primarily geared
towards small businesses that are seeking less than $100,000. There is even a
specialized truncated application that can be used for some SBA loan programs
where the borrower is seeking less than $100,000 ($50,000 for other SBA loan
programs).

Often times, due to credit
issues, lack of collateral, or having a bad credit score can prevent you from
properly obtaining a business loan via the SBA. As such, you may want to look to
other sources of capital to get the financing you need to expand or launch your
business operations. If you are already an existing business then one of the
common alternatives to the 7a SBA loan is to find private investors that can
directly provide you with equity capital for your business expansion. Private
investors can also be used for startup businesses that do not qualify for the
SBA 7a loan. However, you should be aware that in most circumstances the private
investor is not going to want to extend you a loan. Rather they are going to
want a percentage of your business in exchange for the capital they will be
putting in your business. This also means that you will need to cede a certain
level of control to your business’ investor. Prior to working with an investor
(if you have not been able to obtain a SBA 7(a) loan), you should hire an
attorney that can advise you on all of the different matters pertaining to this
issue.

First, let’s focus on the
factors that the bank will look at most closely when they are pondering their
credit decision regarding your 7a SBA loan. Factor one is the collateral that
you currently have, how much money you owe to other creditors, and what assets
that you will be purchasing with the 7a SBA loan funds that you are seeking.
When a bank examines your financial life, they will focus on all aspects of your
financial background. The most important collateral that you have is any and all
real estate assets that you hold as well as any securities that you may have in
non-retirement accounts. Once you have calculated your assets, you need to
subtract any liabilities that you have against these assets. This is your
tangible net worth. This is an important calculation that will be used when
determining how much, if any, funds you can borrow through a 7a SBA loan.

Second, a bank as well as the
Small Business Administration will look at your past credit history when looking
to provide you with a SBA 7(a) loan. If you are applying for a business loan in
today’s lending environment then you should have a FICO score of 700 or higher.
You can find out your FICO score by pulling your credit report from any of the
three major credit bureaus. The most popular credit bureau among banks that
extend SBA 7(s) loans is Experian although Equifax is also commonly used to
determine your credit quality. If you have outstanding issues with your credit
report then you may want to contact your certified public accountant or credit
counselor. If you have not yet hired a certified public accountant, you should
do so as soon as possible. They will help you immensely as you progress through
the SBA 7(a) loan application process.

One of the most common
questions asked among entrepreneurs when seeking a 7a SBA loan, is whether or
not a past bankruptcy would affect an individual’s ability to obtain this type
of financing. The answer to this question is yes. Unless there are extraordinary
circumstances surrounding the bankruptcy, the chances of you obtaining a Small
Business Administration backed credit facility is limited if you have had a
bankruptcy over the past seven years.

Now that we have discussed
credit and personal collateral, it is time to focus on business collateral.
These assets are what you intend to do with the financing that you may be
receiving through your 7a SBA loan. It is extremely important to document what
you intend to do with the funds both within your business plan and in a stand
alone document that showcases exactly what you are purchasing. If you are using
the funds from the 7a SBA loan to acquire tangible equipment or real estate then
you should submit formal appraisal reports or invoices that indicated what type
of equipment you may be purchasing (brand names, models, prices, etc.), as well
as formal property appraisals for any property that you may be purchasing with
the loan proceeds. If you are intending to purchase owner-occupied real estate
with your SBA 7a business loan then you should make sure that the individual
completing the appraisal is properly licensed within your state to provided
qualified appraisals. You should also make sure that your lending institution
accepts appraisals from the individual or property appraisal firm that will be
completing the work for you. A typical property appraisal costs around $500
although the costs can be much higher if you are seeking to purchase a very
large property. The business collateral that you are purchasing is an extremely
important part of a SBA lending bank’s view of whether or not to extend a loan
to a borrower.

Now that we have focused on the
nature of the business collateral that you are seeking, it is time to make
preparations in regards to your business plan. Your business plan, as we have
discussed many times throughout this website, should be used to as a tool to
show your bank exactly what you intend to do with you SBA 7(a) loan, what
service or product your business will offer to the general public, how many
people you will be hiring from the onset of operations, and the profitability of
your business during the first three to five years of operations. Although many
banks only require three year financial statements, it very important that you
provide your SBA 7a loan lender with as much information as possible (sometimes
beyond what is required). In regards to the financial statements you will be
required to prepare - you will need to have properly formatted profit and loss
statements, a cash flow analysis, a balance sheet, a breakeven analysis, and a
business ratios page that showcases all applicable lending benchmarks. There are
several different ways that you can format your business plan, but your plan
will need to have the following components:

An Executive Summary – This section of the business
plan will provide the reader with a roadmap for the rest of the business plan.
In this section you should focus on how much money you are seeking, your
background in the industry that you intend to work within, the products or
services that you intend to offer once you receive funds from the 7a SBA loan
program. You can also put a small overview of the anticipated profit and loss
statements for your business within this section of the business plan.

Products and Services – This section of the business
should provide a concise overview of the operations of your business, the
products or services that you will be providing or distributing, and any
pertinent information that relates to your business.

Market Research – This section is the most overlooked part of the business
plan by people that are writing plans specifically for obtaining SBA 7a loans.
In this section you should provide an overview of the general economy and how
certain factors can impact your business, an discussion regarding the industry
that you will be working in, a demographic analysis, and the competition that
you will face in the markets that you will be developing your business
operations.

Marketing Plan – This section should have a specific focus on how you intend to
market your services or products the general public. You should list specific
sources regarding of where you will put advertisements or marketing campaigns.
If you intend to hire a public relations or marketing firm to assist you in your
marketing operations – their name and address should be listed in the business
plan.

Personnel Summary – In this chapter of the business plan you should list how
many employees you will be hiring (including yourself) and how much each
employee will be paid. In this section you should also provide a full resume of
yourself, any other owners of the business, and any key employees.

Financial Plan – In this section you should provide the fully certified financial
statements as discussed earlier in this article. Again, this section should have
monthly and quarterly profit and loss statements, balance sheet, common size
income statement, business ratios, and breakeven analysis.

SWOT Analysis and Critical Risks and Problems – In these two sections of the
business plan you should focus on the risks that you business may face, problems
with your business operations, and how you intend to grow the business over the
next three to five years of operations.

Now that you have assembled
your SBA 7(a) loan business plan and completed your loan application – it is now
time to visit the bank. Many people often ask us, in regards to 7a SBA loans,
whether it is better to approach a small bank or large bank when seeking
business financing. The answer is that it depends on the scale of your business.
SBA loans are made by community banks, credit unions, and large money center
banks that have thousands of branches around the country. If you are not
applying for a 7a SBA loan then it may be in your best interest to go to a
smaller bank as they will have a better understanding of your local industry,
local economy, and they are more likely to lend to small businesses that operate
within your area. For an SBA loan, large banks very much extending this type of
credit to borrowers. This primarily due to the fact that in the event that your
business fails, Uncle Sam will reimburse the bank with up to 90% of the capital
that they lost on the transaction. However, you will still be required to make
good on the loan and you will be required to give the SBA 7a loan lender your
personal guarantee. This means that in the event of a credit default, your
personal assets can be seized by the bank in order for them to recoup their
investment. There is a certain level of limitation as to what assets the SBA can
take from you in regards to recouping a bad loan investment. However, you should
always consult with a financial advisor prior to obtaining a 7a SBA loan when
you are seeking to determine which assets could potentially be repossessed by a
lending bank. One of the other reasons why it may be advantageous to apply to a
large bank for a SBA 7a loan is that these organizations often make an
additional profit by reselling pools of SBA loans (based on credit quality and
maturity) to third parties such as insurance companies, mutual funds, hedge
funds, and pensions that need to generate income from ongoing debt investments.
This practice was very common prior to the credit default crisis that began in
2008. However, since securitization laws regarding SBA 7(a) loans have increased
in the wake of the crisis this practice has diminished significantly. New
legislation is seeking to provide a more transparent method of securitizing SBA
7a loans and other Small Business Administration backed credit facilities in
order to provide a greater amount of lending services to small businesses.

Finally, the overall key to
obtaining a 7a SBA loan or any other type of credit facility is to be prepared
and to have the proper counsel in place to guide you through this process. If at
any point you do not understand the terms of your loan, the language of the SBA
7a loan contract, or how to properly present your case to the SBA then it may be
in your best interest to hire a qualified attorney, CPA, business advisor, or
financial advisor to assist you with the process. In future discussions, we will
discuss more thoroughly the people that can assist you when obtaining 7a SBA
loans.